Trusts

Here are frequently asked questions regarding trusts and whether they should play a part in your estate plan.

Q.	What is a trust?
A.	A trust is a legal relationship where one person (the trustee) holds legal title to personal and real property for the benefit of another (the beneficiary). A trust is created when the settlor signs a document that creates the trust (the trust agreement).

Q.	Are there different types of trusts?
A.	Yes. Trusts can be created during your lifetime (known as living trusts or intervivos trusts) or they may be created in your will (called a testamentary trust, because it was created in your last will and testament).

What are the features of a living trust?

The person who creates a living trust is the settlor (or sometimes called grantor or trustor; they all mean the same thing). The person or entity who manages the trust is the trustee and the person for whom the trust is created is the beneficiary.

Many times, an individual will hold all three positions, meaning that they create a trust (settlor) in which they name themselves as trustee while they have full capacity and are alive, but name other trustees as successors in case they become incapacitated or die. They can also use all of the trust assets for themselves (beneficiaries) during their lives, then direct that the trust use the assets for a spouse or children or other beneficiaries when they die. A trust can serve many purposes and be very flexible.

Most living trusts are revocable, meaning that the settlor can amend or revoke the trust at any time. This provides flexibility for the changing circumstances of one’s life. Sometimes, it is called a revocable trust.

Sometimes, a settlor wants to create an irrevocable trust, meaning they will NOT have ability to amend or revoke it. Usually this is done for tax planning purposes by creating, for example, an ILIT (an irrevocable life insurance trust), which moves the value of the asset out of the settlor’s estate for estate tax purposes.

In Texas, all living trusts are revocable unless they specifically say otherwise.

Q.	What does a trust control?
A.	A trust controls all assets that are transferred into it. Transfers may be accomplished by the settlor signing a deed conveying property to the trust. In addition, a will might pour assets into a trust when the settlor dies or, there may be a beneficiary designation on an account that transfers the asset to the trust.

Why might I want to use a trust?

There are many reasons a trust may make sense. Here are some of the most common: To designate the age at which the beneficiary enjoys an asset; To ensure assets are shared among multiple beneficiaries at different times or for specific purposes, like education. To protect trust assets from creditors of the beneficiaries (including a future ex spouse). To manage assets for minors or disabled beneficiaries without the expense and court supervision of a guardianship. To avoid probate. Texas has one of the easiest and least expensive probate systems in the country if you have a properly drafted and executed will. Thus, “avoiding probate” is not the rallying call of estate planners here like it is in some states that have a complex and expensive probate system. Still, using a trust to avoid probate is a great strategy if the settlor owns property in a state other than Texas. And of course, avoiding probate is important to settlors who value their privacy and do not want their affairs made public in the probate records.

You didn’t mention saving taxes or protecting trust assets from my creditors. Aren’t those great reasons for creating a revocable trust?

Actually, no. A revocable living trust will not save estate or income taxes or protect the trust assets from the settlor’s creditors. If you, the settlor, can get to the assets, or change or revoke the trust, then your creditors, including the IRS, can get to them as well.

There are scams that try and trick consumers into buying living trust packages that they may not need. The State Bar of Texas has produced a fact sheet regarding these tricks that you can access here: TexasBar.com.

Q.	How do I determine if a trust is right for me?
A.	Each situation is different so the smart move is to contact us to schedule a free initial consultation. Once we are clear on your needs and intentions, we can help you decide if a trust would help achieve your goals.